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Spending Patterns for Prescription Drugs Under Medicare Part D

The centerpiece of the Medicare Prescription Drug, Improvement, and Modernization Act of 2003 (Medicare Modernization Act) was the creation of Medicare Part D, a subsidized pharmaceutical benefit that went into effect in 2006. That additional coverage—which provides outpatient prescription drug insurance to seniors and to people under age 65 with certain disabilities—constituted the most substantial expansion of the Medicare program since its inception in 1965. In 2010, the federal government spent $62.0 billion on Part D, representing 12 percent of total federal spending for Medicare that year.

Under Medicare Part D, all enrollees receive a subsidy for prescription drug insurance; an additional low-income subsidy (LIS) is available to enrollees with sufficiently low income and assets. (In this issue brief, Part D enrollees who receive the LIS benefit are referred to as LIS enrollees; all others are referred to as non-LIS enrollees.) Enrollees in Part D choose a prescription drug insurance plan from a number of competing private plan sponsors. Total spending on Part D drugs equals the sum of spending by all payers combined, including plan sponsors, beneficiaries, the federal government, and third-party payers; in this brief, it is measured on a per-beneficiary basis. In 2008—the most recent year for which data were available when CBO undertook this analysis—average spending for non-LIS enrollees was $1,800. The amount of spending varied widely across enrollees in that category: for 7 percent, no spending occurred, whereas for 6 percent, the amount was at least $5,000. Enrollees who spent more tended to fill more prescriptions and more-expensive prescriptions. The federal government covered roughly 40 percent of non-LIS spending through premium subsidies, and beneficiaries covered most of the remainder through premium payments and out-of-pocket spending.

Average spending for LIS enrollees in 2008 was $3,600, double the spending for non-LIS enrollees. A slightly larger share of LIS enrollees (9 percent) had no Part D spending, but a much greater share 23 percent) had spending of at least $5,000. As with the non-LIS population, higher spending among LIS enrollees was driven by beneficiaries who filled more prescriptions and who filled more-expensive prescriptions. The higher spending among LIS beneficiaries most likely reflected that group's generally poorer health status and the more generous coverage available through the low-income subsidy. Because of that additional subsidy, the federal government covered 95 percent of LIS spending in 2008.

This issue brief reviews patterns of Medicare Part D utilization and spending among the non-LIS and LIS populations. Other important topics relating to Part D, such as the provision of public benefits by sponsors of private plans and competition among those sponsors, are beyond the scope of this analysis.